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Illustration: Annelise Capossela/Axios

It's not a Lehman moment but it's still a very big deal. Chinese construction giant Evergrande looks set to default on its $300 billion of liabilities, in a move that has already had global market repercussions.

Why it matters: Evergrande is the first big test of the global financial system — and especially the Chinese financial system — since the pandemic-induced chaos of March 2020, when central banks around the world were forced to take unprecedented measures to prevent total collapse. So far, world markets seem to be coping just fine.

Data: FactSet; Chart: Axios Visuals

Context: By any measure, an Evergrande debt default would be one of the largest in history of the world.

  • To put its $305 billion debt load in perspective, Argentina's massive foreign-debt default in 2001 was about $93 billion; Greece's restructuring in 2012 was about $200 billion; and Lehman Brothers had about $600 billion in debts when it filed for bankruptcy.
  • While those defaults shook entire economies, Evergrande seems to be causing little more than some medium-sized market jitters — not even enough to derail the huge number of IPOs (14) due this week.

Between the lines: Evergrande debt has always carried a low junk rating, and the company was being described as "the biggest pyramid scheme the world has yet seen" as long ago as 2017. As a result, investors in Evergrande, much like investors in bitcoin or GameStop, were acutely aware that they were taking a big risk.

  • Financial crises generally happen when (seemingly) safe assets unexpectedly default, not when risky assets do something that was largely foreseen.

The big picture: The Chinese government has been worried about the amount of debt in the domestic property sector for years, and has aggressively been trying to force the large players, including Evergrande, to deleverage.

  • Evergrande's failure — along with that of other highly-indebted companies — can be seen as a price that the Chinese government is willing to pay in order to make the country's broader financial system less risky.

What's next: As economist Adam Tooze asks: "The crucial question is, can Beijing manage this controlled demolition?"

  • China's markets won't open until Wednesday, so we'll know more about their signals then. (They're closed Monday and Tuesday for the Mid Autumn Festival.)
  • A full-scale crisis is still possible. But consensus among China watchers — coupled with the magnitude of the market reaction thus far — implies that Beijing is aware of the risks and has financial firefighters waiting in the wings in case of emergency.

The bottom line: It's normal and healthy for markets to fall when giant companies fail.

Go deeper

Oct 12, 2021 - Politics & Policy

House temporarily raises debt ceiling, averting default

Photo: Tom Williams/CQ-Roll Call via Getty Images

The House of Representatives followed the Senate on Tuesday, voting 219-206 along party lines to raise the federal debt ceiling and officially avert a potential default.

Why it matters: While Congress has pushed off the debt limit issue for now, the fight over a final resolution will be even uglier come December — when lawmakers need to address the problem once again.

Oct 12, 2021 - World

Companies still optimistic after China's youth gaming restrictions

Illustration: Sarah Grillo/Axios

China's new regulation limiting children under 18 to just three hours of online games per week may be devastating for dedicated gamers, but gaming companies — and the advertisers that rely on them — will likely be fine if they can adapt.

Why it matters: China comprises about a quarter of the world's gaming market; the country's mobile gaming industry alone raked in more than $29 billion in 2020.

Tina Reed, author of Vitals
2 hours ago - Health

FDA panel endorses shot of J&J booster for adults

Photo: Wolfgang Kumm/picture alliance via Getty Images)

Members of the Food and Drug Administration's vaccine expert panel on Friday unanimously endorsed a booster shot for adult recipients of Johnson & Johnson's COVID-19 vaccine at least two months after the initial dose.

Why it matters: The advisory committee raised concerns about a dearth of data to support their decision but ultimately decided to support an additional shot for those over 18.

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